NO COST Mortgage Loans - Are They Real?
A unicorn? Or how 'bout ...
Is there such a thing as a "NO COST Mortgage Loan"?
It's a question I hear often as a loan officer, as it's obviously an enticing option for any borrower to consider ... one that's dangled in front of them in many lenders' advertisements.
I typically hear from hopeful borrowers after they've seen or heard a commercial of this type on radio or cable. They reach out to me to get the facts and learn more, typically excited and with high expectations.
But the truth is, and the truth that I must share with borrowers is, that there is virtually no way to complete a mortgage where the Lender provides a credit for all the fees. A Lender simply can't complete a mortgage not charging any closing costs or fees at all. After all, there are REAL production costs of originating, processing, and underwriting a mortgage loan. So what really happens, say on a Refinance loan?
If refinancing, and a borrower does not want to incur costs at the closing table, a Lender can:
- Add the actual fees charged for closing to the mortgage payoff balance, in other words, borrow the closing costs.
- The increased mortgage loan amount then offsets the closing costs and pays off the borrower's existing mortgage
- Or, as a Borrower, you can accept an interest rate higher than current market rates. From the higher interest rate charged (excess), the Lender then covers some or all of the Closing Costs being incurred by the Borrower
If you're purchasing a home and a borrower that wants (what is typically referred to as) a "NO COST" loan:
- You need to negotiate a real estate purchase contract that includes Seller-paid costs (extremely hard/unlikely in a highly-competitive housing market)
- Or ... the Lender must increase the mortgage interest rate and used the "excess interest earned" to offset or pay for the closing costs. This is shown as a "Lender Credit" at the time of closing
But the bottom line is this: If you're a buyer choosing one of the options talked of above ... and choose the option to arrive at the closing table with no cash or money in hand (known as "cash to close", not closing costs) ... it does NOT mean closing costs or fees weren't charged for your loan. The costs and fees are just reflected elsewhere within the loan structure.
As a borrower, how do you determine if you're being charged closing costs and fees?
Compare your current Principal Balance to the projected new loan amount. If the new loan amount is higher and beyond that of newly-borrowed funds or equity disbursement, the excess is most likely closing costs or fees charged.
That amount reflects the costs incurred to do the Refinance.
So what are closing costs ... and what do they typically run?
Closing costs are fees due at the closing of a real estate transaction in addition to the property's purchase price. Or, in the case of a Refinance, the loan balance.
The following are the most common costs seen in Chicagoland transactions:
- Title Insurance
- Closing Services
- Lender Origination Fees (for Processing and Underwriting)
- HomeOwners Insurance Premium (also Escrow set-up)
- Attorney Fees (in Attorney States/if used)
- Appraisal Costs
- Real Estate Taxes (Escrow set-up)
- Home Inspection Costs
- Recording Fees
- Transfer Taxes (where applicable)
- Credit Report Fees
- Flood Certification
- Homeowners Association Documents (if applicable)
- The proposed loan amount VS the costs of that loan coupled with the payoff of an existing debt (mortgage balance) ... also known as the "amount owed"
- A breakdown of all the costs and fees charged, and whether or not the Borrower intends to pay for them "out of pocket", at Closing, or ...
- By adding those costs to the existing loan balance and then setting the new loan amount at that level, to effectively limit the "cash to close" to ZERO dollars at the time of Closing
Contact me! I'll put my 40 years of Mortgage experience and expertise hard to work on your behalf.
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